On Background

Tough Choices Ahead: Homeowners' Tax Relief Could Be Among Them

By Dick Pettys
InsiderAdvantage Georgia

(7/28/08) There’s at least one thing working in Gov. Sonny Perdue’s favor as he struggles to steer the state through the latest financial trough -- lawmakers in 2009 won’t have a case of election-year jitters when it’s gut-check time and he asks them to make hard and, very likely, unpopular budget decisions. (It will be 2010 before they have to run again.)

One of the decisions they may have to make, however, is whether to keep or repeal the enhanced homestead exemption tax relief program which Roy Barnes promised during his 1998 campaign, delivered in 1999 and now is costing the state $428 million a year.

(The program is contingent upon an annual appropriation, so technically lawmakers have to decide each year whether to renew it. So far, that’s been pretty much a no-brainer for reasons I’ll mention below. But 2009 could prove to be a legislative session in which there are no easy choices - and the Barnes tax relief program might come into play.)

We’re hearing that already there have been some very limited discussions in government circles about eliminating the homeowners’ tax relief program, but as far as we can tell it has progressed no further than that at this stage. And it is way too early for the governor to have finalized a strategy. Besides - even after tapping the shortfall reserves for $600 million, he’s still got $900 million in the rainy day fund.

Still, bond-raters like it much better when states don’t deplete their reserves, and the homeowners’ tax relief program is one that was implemented by a Democratic governor. While some Republicans, for philosophical reasons, always have looked at it as “low-hanging fruit,” the problem is, nobody knows if - politically - it’s also poison fruit that’s best left alone.

Chances are, you’ve forgotten what this is and, frankly, I have to refresh my memory, too, every time I write about it.

Here’s a little background:

In 1998, Zell Miller was in his final year as governor, and the race to replace him ultimately boiled down to Democrat Barnes and Republican Guy Millner. Soaring property reassessments, particularly in Fulton County, were heavily in the news at the time.

Millner had already staked out a tax-cutting theme by proposing to eliminate the property tax on cars. It was a pretty simple plan that could be expressed on a bumper sticker, as he did: “Ax The Tag Tax.”

To counter that, Barnes came up with a plan that would need a highway billboard, rather than a car bumper sticker, to explain. The basics: in addition to the standard $2,000 homestead exemption which local governments are required to give, the state would reimburse local governments for, in effect, giving homeowners an extra homestead exemption that was supposed to grow over time.

The result is that homeowners now have an extra $8,000 in homestead exemption (for a total $10,000), with the state reimbursing local governments for the biggest part of that.

(We’re using the term “homestead exemption” somewhat loosely. The extra $8,000 attributable to the state isn’t technically an additional homestead exemption. It’s simply a credit which the state pays to local governments so that it acts like an additional homestead exemption.)

Time and tide now have overtaken the program, and millage rates and assessments have crept higher and higher. The additional tax break - perhaps a couple hundred dollars on a $6,000-plus tax bill in Atlanta - is little noticed now except by those who read the fine print on their tax bills.

Procedurally, it wouldn’t be complicated either to reduce or eliminate the tax program, since it could be done through the budget process in the Legislature. But clearly it would be palatable to the Legislature only if it was the “best” of a number of bad options.

The reason: while taxpayers might not notice the extra homestead exemption now, they would clearly notice if it suddenly disappeared.

And then there is the matter of state-county relations. While county officials might take the heat from taxpayers for the sudden increase in tax bills, they likely would point fingers back at the governor and the Legislature. The governor and the Legislature no doubt would counter that counties (which have their own economic problems) had the option of picking up the slack.

Not something you want to walk into without both eyes wide open, but Perdue offered something very similar in 2003 when he took office facing another huge budget crunch. The Legislature - then split between the two parties, with the House under Democrat control and the Senate under the GOP - took the idea off the table.

There are some in government who think the current financial problem is as bad - or worse - than the one Perdue inherited when he took office. And potentially compounding the problem is this: if a judge rules against the state in a suit scheduled to be heard this fall over the adequacy of school funding, Georgia’s government could be on the hook for hundreds of millions of more dollars for education. (Appeals possibly could keep the case tied up until the next governor had to worry about it.)

But in a perfect-storm scenario, there’s one more tax break that could come into play: the exemption of food from the state sales tax.

Passed by Miller in his second term, that will cost the state $740 million in lost revenue during the current budget year.

Budget managers are smart people. They may be able to find work-arounds that, while painful, may avoid some of these more extreme steps.

But from people I trust, I’m picking up a fair amount of pessimism in government just now.

Stay tuned. We’ll be hearing a lot more about this after the November elections.

***

Just how bad are things? Here's the view of Senate Appropriations Committee Chairman Jack Hill in his latest weekly letter. I considered running excerpts but felt that wouldn't do justice to his tone and intent:

By now policy-makers and the public are both generally aware of the shortfall in the just completed fiscal year and have grasped the fact that substantial funds were used from the Shortfall Reserve Fund to balance the state’s books at the end of June... They are also generally aware that a substantial amount remains in the fund ($902 million) as we begin the fiscal year. Citizens do understand that the economy has rapidly slowed and consequently state revenues have declined even faster and more deeply than first believed.

So there is a feeling that revenues are flat going into this year and that the budget may have to be cut to keep expenditures on an even keel. If there is a misconception, it is the questionable belief that a combination of budget cuts that exclude education and Medicaid along with the Revenue Shortfall Reserve fund are sufficient for the next year.

That scenario could play out exactly like the description above, but that is far from a certainty. Here are several points to ponder:

1. The trend line of revenues for the past few months is generally down and no leveling is apparent yet-- meaning that we do not know if the bottom of the slide has been reached. In 2002-03 the state went through an entire year of negative revenue figures.

2. The 2009 budget contains about $700 million in new spending based on original adjusted year long growth rate projections. But we start the Fiscal year $763 million short due to last years revenues not meeting the FY 2008 estimate by the end of June. So, the shortfall is really the total of those figures, approaching $1.5 billion. Of course that figure would be reduced by any positive growth in the next 12 months.

That is where we stand today. What could increase the shortfall would be on-going negative revenue collections month by month. These numbers, then, assume a flat or no growth rate in the coming year which is certainly not a sure thing.

Governor Perdue has tasked Executive Branch departments to begin formalizing 3.5% budget cuts in the FY09 Budget. But with Education and Medicaid currently exempt from these reductions, these cuts will only accumulate about $250 million dollars....that is not to say that these are not substantive cuts. For example, 3.5% is a $40 million cut to the Department of Corrections. The Board of Regents' 3.5% amounts to an $80.5 million cut.

The public should be reassured that the state has weathered stormy weather before and survived by using reserves and judiciously but fairly cutting budgets. As reported here last week, a positive is that the new fiscal year is just beginning and decisions can be made with a minimum of interruption. So, here are some points to consider in the weeks ahead:

1. The easiest cuts to be made are those cuts of new funds not yet expended. The new funding added in the 2009 budget for whatever reason are easier cuts to make than those of existing programs. Some growth areas of the 2009 budget are: DHR $70 million plus, Department of Education, $420 plus million, Board of Regents, $150 million plus, Department of Corrections, $60 million, Dept. of Community Health, $110 million, just to name some of the top agencies in new funding.

2. Is this a good time for a Zero-Based Budgeting Analysis of programs across state government to find non-productive or wasteful programs--and can departments be depended upon to make those objective decisions?

3. Another possible area of savings might be to delay or reduce capital outlay bonds for new construction of schools, colleges, and state buildings. While this totals over $112 million in cash, one negative impact would be the loss of stimulus to the economy from the construction expenditures.

4. Included in the new spending is, of course, the pay raises totaling some $253 million for teachers, faculty and state employees. Of course these funds go straight out into the community through expenditures, but, nevertheless, that is a large number included in new funding in the 09 budget.

It is still a true statement to say, that if the '09 budget was being written in June as North Carolina's was, Georgia budget writers would not have included any new spending for 09 and passed a flat budget as North Carolina did.

There is plenty of evidence, though, that Georgia will rebound strongly--just how soon is the question. The military build-up on each side of the state at Fort Stewart and at Fort Benning, the continued growth of imports and exports through the Ports at Savannah and Brunswick, including millions of square feet of related warehouse space being constructed, other growth along the I-16 and I-85 corridors and of course the growth related to Kia, now at 6000 jobs, all point to a strong recovery. But tax growth from new jobs follows along after the jobs go on-line.

Georgians should not fear the future because this state's best days are ahead of it, even as we ponder difficult short-term decisions.